Service charges: Lip service to retailers or a plan of action?

Good news is in scarce supply, so to hear that landlords are looking at ways to reduce service charges in their shopping centres was a rare positive for retailers earlier this month.

Retailers have often said that landlords need to be more transparent about how they spend their money, and many have accused landlords of not being as efficient with their use of it as they would like. Consequently, service charge disputes have been numerous.

The highest-profile example has been at Westfield London. A row has been raging since before the centre opened last October about the charges being asked for by the developer, which retailers have not only said are too high but are higher than the developer originally quoted. Service charge consultants have been appointed to work out the level retailers should reasonably be paying, and will report their findings at the end of May.

But now three UK retailers – Arcadia, New Look and Next – have formed a group with landlords Land Securities, British Land, Prupim, Liberty International, Hammerson, Legal & General and Westfield to try to find a solution to the tension over service charges. Together they have come up with a framework that aims to change the way charges are calculated and address some of the problems that they cause.

It is not the first time anyone has looked at reducing service charges. Most landlords say they already see the need to keep costs down as a given, but this is the first time that guidelines have been put down in writing. So is the working group’s 10-point plan a groundbreaking piece of work? Or does its value lie in the fact that it has raised awareness of the problem?

It has certainly been welcomed by retailers. Clinton Cards finance director Barry Hartog says: “We have 1,000 stores and nearly half of them are in shopping centres. We welcome any initiative that would help reduce costs for tenants.”

A Carphone Warehouse spokesman adds: “We’ve been pushing for this for a while and we’re very happy that it’s finally making some headway.

Anything to reduce fixed costs at the moment is very welcome.”

How it works in practice, of course,  remains to be seen. Jeremy Collins, John Lewis head of development and president of the British Council of Shopping Centres (BCSC), says: “The devil will be in the detail. It’s all about how it can be delivered in a big way across the sector, rather than a few shopping centres.”

The plan impresses with the depth in which it explores all the components that comprise service charges that retailers pay for in shopping centres. Because it addresses all areas – from toilet cleaning facilities to waste management, security and marketing – it makes it easier for retailers to establish what they are getting for their money.

The detailed nature of the plan also means there are few stones left unturned in terms of where costs might be cut. Under each area – such as hours of operation, utilities and energy management – there are practical and realistic ways that money can be saved.

Moreover, the fact that the findings come from a four-month pilot scheme at some of the top shopping centres in the country in consultation with retailers gives them added clout. Even in this short period, impressive savings of up to 20 per cent were made. This proves it is possible to make big savings and provides a valuable frame of reference for retailers in discussions.

But is there anything new in the plan? King Sturge head of shopping centre management John Michell says that while this is a useful exercise, the intention has long been there. “A lot of what they’re saying here is actually already happening,” he says. “The various initiatives are not something that we thought ‘oh crikey, we hadn’t thought of that’. I like to think that we’re pretty well aligned with these ideas already.”

Michell adds that firms such as King Sturge have been working alongside landlords for years to successfully reduce costs – a fact he says the 10-point plan overlooks.

However, Land Securities managing director of retail Richard Akers says this is missing the point. “We’ve always recognised the need to take action to reduce costs. This is another step forward. It’s about communicating to a group of landlords and retailers about what they can do to reduce costs to the benefit of both parties,” he says.

Michell also says the onus should not just be on landlords. He believes there is more retailers can do – particularly regarding recycling and waste management, which is one of the plan’s key sections. “Retailers produce a phenomenal amount of waste,” he says. “What they are saying is exactly right, but there must be more buy-in from the tenants as well – not just from head office but from the shops as well.”

A sign that the working group’s initiative is already bearing fruit is that the BCSC is in the process of preparing a response to the 10-point plan. In this it will publish its own advice as to how retailers and landlords can put the working group’s guidelines into practice.

While the 10-point plan may not be groundbreaking, it is notable for being the first time that so many major retailers and landlords have worked together in such a collaborative way to produce a clear set of guidelines that the rest of the industry can follow.

It is not possible to change such an established system with one pilot scheme and a set of guidelines, especially because service charges cover so many different aspects of the business. It will be some time yet before the real results of the 10-point plan can be judged.

What is important now is that landlords and retailers not only study the working group’s advice, but take it seriously. “A 10-point plan doesn’t bring down service charge in itself,” says Collins. “It’s essential that it remains on the agenda. I’m sure that through the media and the work of the BCSC and the BRC there will be sustained pressure on landlords.”